Dec 012012

Background:  If you are unfamiliar with my concept of CPE (Continuous P/E), please read my CPE Explanation Page before continuing with this post.

AAPL has firmly rejected the low valuation levels seen two weeks ago.  After falling to a CPE 11.4 intraday low, it closed above the CPE 11.8 level and has moved up strongly ever since.  CPE 11.8 was the valuation low from late 2011, and we never closed below that level.  That is a confirmation of that valuation level as a low for AAPL, and a rejection of such a low valuation.  Buyers are fully willing to step in and strongly buy AAPL when valuation gets that low.  The AAPL price action rejected all valuation levels below CPE 12, paused briefly near the CPE 12.6 level that was important back at the May low, and has pushed up to CPE 13.

Where are we now?

CPE 13.  That’s where we are now.  But that’s not meaningful unless we look at the Valuation Range Chart.  We can see that we are still below the mid-point of the valuation range over the past year, which has ranged from a low of CPE 11.4 to a high of CPE 16.2.  The mid-point is therefore CPE 13.8, which is presently near 620.  Last quarter was a high valuation quarter, and we traded largely in the upper half of the valuation range.  This quarter is a low valuation quarter.  I expect we will trade largely or entirely within the lower half of the valuation range.  Price has recovered nicely up to this point.  We have filled the gap at 580, and have traded within the range of Oct 26, the high volume day after the most recent earnings release.  I expect this area will provide some resistance.  Interestingly, we have also retraced almost exactly a Fibonacci .382 of the valuation range, which would mean a move to CPE 13.2.  AAPL is back to a reasonable, if not still somewhat low, valuation level.  But since this is a low valuation quarter, “somewhat low” valuation is quite a reasonable valuation to spend some time at.

What’s next?

(Update Note: This section turned out to be too bullish regarding the trading range into the end of the year.  Read the update sections below for how my analysis changed as new information was presented)

At some point between here and the end of the quarter (I measure quarters from earnings release to earnings release), AAPL will need to retest the lows.  It can do that with a brief plunge again that gets bought up, or it can do that with a narrow consolidation range.  Look at the trading in June of this year on the Daily CPE Chart to see an example of coming off a low and then trading in a range before moving higher.  This valuation range between the two red lines on that chart, CPE 12.6 to CPE 13.4, would be a very logical range to trade in through the end of the year.  We could push up to the 610 area first, then fall back into that range, or we could have already put in a short term high already.  Whatever happens, the overall theme of this being a low valuation quarter means that AAPL valuation should remain under pressure through the end of the quarter.  Under how much pressure?  Well, let’s take a look at some recent history…

AAPL End of Year Valuation Weakness

Most AAPL followers are used to seeing AAPL price rally end of the year and into January.  It is frequently making new highs amid strong holiday sales and expected strong earnings and earning growth to be reported in January.  With the exception of late 2008 during the financial crisis, that has been AAPL’s price pattern for years.  BUT, and this is a big but, that has NOT been what has happened to AAPL’s valuation at year end.  While AAPL’s price is usually strong at the end of the year, AAPL’s valuation has done just the opposite.  For every year the past 4 years AAPL’s CPE valuation level has dropped at the end of the year, and has closed the quarter near the CPE low.  Look at the CPE Range Chart to see this phenomenon.  Look at each December candle.  Those represent the CPE levels for the quarter from the earnings release in September until the earnings release in January.  Every one of them is a solid red candle, closing the quarter near or at the low of the quarter.  AAPL ends the quarter in January just before earnings at the lowest CPE valuation level of the quarter.  Now look at this current quarter so far.  We are now sitting in the upper part of the range for the quarter.  So will we go back down to the CPE low, back near CPE 12 or lower, between here and January 22?

This will be very interesting to watch.  Will price seasonality hold true, with AAPL rallying through December and in to January?  Or will the valuation seasonality trend hold true with AAPL moving to lower CPE valuation levels between here and January?  Or will it be something in between?  Maybe valuation remains under pressure as I’m expecting, but closes the quarter in the middle or somewhat below the valuation range mid-point for the quarter.  The quarter itself has ranged so far between CPE 11.4 and 13.9.  So the mid-point for the quarter would be at CPE 12.7.  On January 22 that valuation level will be near 600.

The reason we’re in this quandary between price seasonality and valuation seasonality is because Apple’s year-on-year earning growth this year will be far below the growth of the past 4 years.  The CPE lines had a steep upward slope during the holiday quarter the past 4 years, so even as price rallied, CPE valuation remained weak with price not able to keep pace with the steeply sloped CPE lines representing the strong earnings growth of the holiday quarter.  Well we don’t have that this year.  The CPE lines are rather shallow this year due to the much lower earnings growth.  Therefore if valuation weakness this year again asserts itself, it will also result in weak price action.

This bears watching.

Update:  Thu Dec 6 – AM

AAPL goes as planned.  We have our short term valuation swing high we were watching for.  I expect that valuation high will act as resistance the rest of the year, perhaps the rest of the quarter (until next earnings).  Our expected retest is under way now too, in stunning fashion.  Yesterday closed exactly at the CPE 12 level.  This valuation level right here should act as support, and needs to act as support.  I want to see any price action that happens below CPE 12 to be bought up aggressively just like last time.  We spent 2 days under CPE 12 last month.  I want to see it spend even less time under CPE 12 this time.  Refer to the CPE Daily Chart for a visual.

Update:  Weekend Dec 9

A moment of truth is right here and now.  AAPL price action is about to determine whether this valuation level down here near and under CPE 12 will be rejected or accepted short term (next few weeks).  We are confident this valuation level will be rejected intermediate term (next few months) as AAPL moves to its next valuation swing high in early 2013.  But right now we are focused on the shorter term through the end of the year and the end of the quarter.  For this shorter term period, things have gotten a lot more complicated due to Friday’s failure to follow through on Thursday’s reversal bar.

If Friday had rallied and followed through to the upside, I would have called for a probable move back to 580-610 area, followed by another spike down at the end of the year completing the bottoming pattern.  This scenario is still possible, but less likely due to Friday’s action.  Friday’s action means there is a higher likelihood that these lower valuation levels down here are being accepted short term.

In my Thursday AM update I said I wanted to see AAPL spend less time under CPE 12 than last month when AAPL spent 2 days under CPE 12.  Thursday spent only a single hour under CPE 12.  That was perfect, exactly what I wanted to see.  However Friday collapsed right back down under CPE 12 for most of the day.  So for AAPL to spend less time under CPE 12 than in November, AAPL needs to move back above 540 by Monday’s close.  If that does not happen, then that means valuation under CPE 12 is being accepted to a greater extent than in November.  That will be a short term negative.  If sub CPE 12 valuation levels are being accepted, then what?

Well, then it will mean this valuation weakness we have been expecting all along for this quarter will result in price action that is more complex, deeper, and pushing these lower valuation levels for more time this quarter than I had originally expected.  In other words, as weak as I had expected AAPL to be this quarter, we are on the verge of AAPL proving that it will be even weaker for more of the quarter.  Don’t take that to mean that we’re heading down into the mid or low 400s.  It just means AAPL would hang out here around CPE 12, or mid to high CPE 11 area, through the end of the year.

Here is a very important point to remember:  You will notice that the CPE Range Chart now reflects a red candle for the current quarter, just as I talked about at length higher in this post (read the section “AAPL End of Year Valuation Weakness” again to refresh your memory).  This price action we are getting now is consistent with the valuation seasonality analysis I presented.  So we really shouldn’t be surprised, should we?  As I said at the end of that section, this bears continued watching.

Update: Weekend Dec 16

We have our answer to the question posed in the last update.  These lower valuation levels are being accepted.  We have now spent much more time below CPE 12 than we did in November. This price action neutralizes the V bottom in November.  We are now back in the mode of looking for new confirmation of a valuation low, and the possibility of probing lower for a new valuation base.

What we have here is a compounding of two valuation factor and one technical factor.  The first valuation factor is the End of Year Valuation Weakness seasonality as explained in the section on that topic earlier in this post.  The second valuation factor is P/E compression due to decreased earnings growth.  The AAPL TTM Earnings Growth will be about 30% as of January earnings.  That is the lowest yearly growth in many years (since before the iPod era) and less than half the average growth of the past 2 years.  And lastly, the technical factor is the correcting of the explosive rally in early 2012.

AAPL is now in the mode of seeking out a new valuation base.  That basing formation may be created by an exhaustion, panic bottom like the one in November, or a weeks long rounded formation of value buying.  It is exceedingly difficult to determine which we will get.

Some levels to watch are the valuation low from the financial crisis at CPE 10.4, which is denoted by the blue line on the Valuation Range Chart.  Furthermore, if this down move is destined to take out 505 with continued power, there is a Fibonacci target at 471 that bears watching.

As a look ahead, keep in mind AAPL always trades in a large price and valuation range every quarter.  After we get a confirmed bottom this quarter, the valuation high next quarter should be approximately 3 CPE levels above where the low comes in.  The CPE Range Chart shows that the size of the valuation moves from quarter to quarter allow us to set our expectation for the next rally.   That is especially true for a quarter that follows a weak December quarter.  Use the CPE Weekly Chart to imagine what that would look like.  I will lay out the parameters of my own expectation in a future post.

Update:  Weekend Dec 23

Nothing of significance changed in the past week.  We are on watch for the valuation low to complete before the end of the quarter (measured from earnings release to earnings release).  We may be bumping along the bottom here to form the base for the next strong rally, or could have one final thrust below 500 to complete the bottoming process.  The Valuation Range Chart makes it clear we should expect an intermediate term bottom in AAPL near here in both time and price.

If we break 500, there is a Fibonacci target at 471 that could be reached in a V-shaped reversal.  Alternatively, this area near CPE 11.1 could be the valuation low that holds.  The very short term is unclear because volatility has subsided, and AAPL price is at an inflection point.  Watch 520.  Above that level and bulls are starting to take control, to be confirmed on a break above 534.  Below 520 and bears will remain in control, with the down trend on their side, confirmed with a break below 500.  But either way, AAPL is indeed in the process of trying to put in a bottom, what with down momentum having waned, and valuation where it is.

No matter what happens with the short term price swings, I expect AAPL to remain relatively weak through the end of the quarter.  Read the “End of Year Valuation Weakness” section above as to why.  Additionally, we should expect AAPL will be down or sideways during the final two weeks before earnings.  That has been the pattern in all of the past 4 quarters, and in 11 of the past 18 quarters.  So here’s some speculation:  If AAPL intends to have a thrust up out of this bottoming formation, the best chance of it would be during the first several days of the year.  If it did that, then it could have its 2 week consolidation or decline into earnings, creating a higher low. That would still satisfy the “weakness through the end of the quarter” expectation, and also still hold the CPE 11.1 valuation level.  Essentially, I’m just in wait and see mode for the next few weeks to see how this bottoming formation will take place.

Intermediate term timing:  The manner in which AAPL topped, with the strong rally to 705 and the strong decline off that level, sets up a predictive timing pattern whereby the price swings on the right will closely mimic the swings on the left that led up to that peak.  This is essentially why Head & Shoulders patterns work and look symmetrical.  The final rally to 705 was 8 weeks, and the first big wave down was also 8 weeks.  The 10 weeks of basing and rallying that came before all that will likely be matched by 10 weeks of basing and seeking a valuation base.  We are currently within that 10 weeks now, and it extends into mid January.  This is an additional reason why I am expecting relative weakness in AAPL through the end of the quarter and into earnings.  For a similar reason, what will follow THAT will likely be a strong rally lasting 5-6 weeks, ending with an expected peak at the very end of February or beginning of March.  At what price?  Well, perhaps only reaching 610, and possibly the 650+ area.  The 610 level comes from a P/E compression down trend channel since spring 2012.  And the 650 level comes from an expected CPE 3 height rally which has been very common with AAPL in recent years.  I will explain all of this in more detail in a future post once we get past the valuation basing we are watching for now.  But I wanted to give a brief look-ahead and the basics of my current thinking of both time cycles and price expectations.  And obviously, actual earnings results will impact those expectations.  The fall decline went deeper than previously expected because of the weak Oct earnings.  The January earnings results will impact the extent (but probably not the timing) of the rally to the next valuation high.

  7 Responses to “AAPL December 2012 – Valuation Weakness”

  1. I’ve been thinking about this all day and decided to rework your basic idea by basing continuous valuation solely in terms of Wall Street expectations. The results basically back up your intuition that AAPL will end the quarter near 600. In fact, I get 585, so all rather disappointing for Apple bulls.

    Digging into the numbers, what jumped out at me was the TTM. The way I calculate it, Wall Street estimated TTM at 43.6 for Q3; Apple missed. They estimated TTM at 44.3 next quarter and were on the money. They currently estimate 43.6 for Q1 and 43.8 for Q2. So that makes one solid year (half in the bag, half to come), where the Street sees no growth in Apple earnings. No wonder we are going nowhere!

    Part of this is due to a confirmation of slower growth by Apple, part is lower margins, and part is that 14th week. But it all adds up to going nowhere fast. The way I read this, Apple needs to both post some impressive profit AND deliver strong Q2 guidance to move the stock-price needle.

    • Great comment. And thanks for the additional analysis and confirmation. The weaker growth is due to the tough comparisons with last year’s FY Q1 and Q2. That is what is causing this quarter’s CPE lines to have a shallow slope. And next quarter’s likely will be shallow too. But then the comparisons become easier for FY13 Q3 and Q4. If the China rollout can continue strong, and with margins improving at the tail end of the current product cycle, Q3 and Q4 could have stellar YoY comparison. I’m expecting the CPE lines to steepen considerably for Q3 and Q4.

      This would translate into the following valuation and price action: Depressed valuation this quarter (has already happened), valuation high around end of Feb falling short of the top of the valuation range channel, valuation low in the spring depressed again, and only then do we get the next solid bull run to valuation highs in the summer or early fall 2013 within steeper sloped CPE lines. What we end up with is an entire year of mostly sideways price action from spring 2012 through spring 2013. Pretty brutal. But that’s about what I’d expect after the early 2012 incredible rally.

      • One other interesting thing I noticed when comparing quarters (earnings to earnings, like you use, but basing P/E on Wall Street expectations): Q1 2012 had a max P/E of 13.8, a min of 11.6, and closed at 13.4, while this quarter has currently put in a max of 14.1, a min of 11.6, and closed on Monday at 13.4. Uncanny!

        If Apple posts 17% above Street expectations as you seem to have penciled in (15.5 vs. 13.3), and the Street raises Q2 expectations by the same (14.6 vs. 12.5), then I see a 14 P/E putting AAPL at 674 in Q2. I think that would modestly move us into a new trading range with prices about 10% higher than at present. So, 10% higher if Apple can deliver an upside surprise of 33% on its bottom-line guidance. It’s a strange world where Apple, sitting at these low valuations, needs a blowout on top of its best quarter ever simply to move the needle so little.

        Just how high do you see AAPL getting by the end of February? I’m putting all my eggs in FEB options after having got destroyed following the advice of a well-known Apple investment site. Your site has greatly helped me in getting a grip on how the stock might perform. On the other hand, the fact that no one consistently predicts earnings with any success tells me that that side of the equation is all one big crap shoot, and perhaps never more so than this quarter where supply and margins have the potential to fall anywhere along the spectrum.

      • Wondering how end of feb could see a high unless we had earnings take us to a slightly higher new range because the p/e would be so compressed otherwise (think blowout of 16-17 q1 eps)

        Typically aapl would peak a week post earnings at the beg of feb.

        • Then again if you buy aapl as a slingshot theory per j Schwartz you could see how far back wound we are and possibly see a overshoot of a Cpe level where’d normally top at leading us into later in feb at the highs.

  2. Hi Kit
    Fellow Bullish Cross member. Your sight was recommended as alternative source and frankly I only wish I have your information before this crash. I read your update and I have several Elliott Wave paid research sources including BC. I have a few questions as I am in a delima. After reading your report I do fully expect a 3 CPE increase from the bottom. But my EW folks are also calling for $470/$480 (that MUST hold or we head down to $420 Gap). Do you feel we will be heading back to $600/$620 range either before or after earnings. In May 2012 at the extreme lows I bought what I thought were conservative spreads for Jan 2014 $700/800 and $760/810. I have a substantial amount and taking a 60% drawdown. I’m afraid of the possibility that Apple searches out that 10+ CPE as that would probably take us to $470 and god forbid that support didn’t hold. I’m torn to sell Monday morning and later buy back a more conservative spread OR hold on and wait for the +3 CPE that probably takes us back to $600 by Jan or Feb. Could you do me a big favor and weigh in on this as to what you might consider doing. I would greatly appreciate any suggestions as it is getting scary with this irrational behavior of Apple.

  3. Just read the 23 December update… nice analysis.

    I do wonder if the one-time effect of the “fiscal cliff” and an impending increase in US capital gains rates could be depressing the CPE further than it normally would. In other words, do you think there’s case to be made that the rebasing process will be artificially concluded by the start of a new tax year (and/or an agreement on the “fiscal cliff”) and that some price rebound will begin sooner than you’re projecting?

    The recent drawdown has taught me not to bet on the very short term (say less than six months) with AAPL, but I’m thinking that a small bet on a rapid runup in January might be worth making. Especially now that the 4th week options are out and have essentially the same pricing as the pre-earnings options. I do think sales in China could be stronger than forecast, and there is still the possibility of an upside surprise in January.

    Of course, the fact that there’s no increase in premium for the extra week could mean that the Street knows there’s no runup coming after earnings…